Beginning his career on Wall Street in 1938, Sir John Templeton pioneered the concept of internation...
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04/17/2012 11:00 am EST
First Asset Investment Management's John Stephenson thinks this country will not be able to fund its debt in the years ahead, and its demise is likely to impact all of the world's markets.
We're talking about Japan today with John Stephenson. Now John, Japan has fallen out of the news largely at the beginning of 2012, but you believe that investors should be paying attention to that market.
Absolutely. This is something that isn't on the front page of the newspaper...it's probably on the 25th page. But eventually, maybe a couple years from now, it will be front-page stuff.
The next debt crisis to envelop the world will be centered and originating in Japan. It and will make Fukushima look like absolutely nothing. It will be child's play.
Why? It's a country that desperately needs an obstetrician instead of a mortician. It has the worst demographics of any country in the world. That would in itself be OK if it didn't have the worst debt problem in the world.
Right now, America has a public debt of roughly 100% of GDP. Japan is more than twice as much, 220% of GDP. Investors around the world say, "You know, it doesn't really much matter. They can keep their interest rates at rock-bottom levels because they're selling it all to their own citizens."
That would be true and would make sense if their own citizens weren't so old and if they weren't just saving right now. About 20 years ago, the average Japanese person saved 20% of what they made. Today it's 1%, because they're getting older, and they're funding their retirement.
What that implies is they may not be able, let alone willing, to buy the bonds of the Japanese government when they really need them. And a 1% move up in rates in Japan in terms of yield doubles the cost of funding that debt for the Japanese government. That's how indebted they are, and that's why it will rock the world.
What does this mean for investors, then?
It means all bets are off. It means that we're going to see markets around the world sell off, once Japan has to dramatically start ratcheting up interest rates, because they're going to have to go out to the rest of the world to fund their operations, to fund their country.
If you're the average Japanese person and you've over the last 20 years or more watched house prices slide in real terms by 70%, and the Nikkei, the main benchmark stock market, fall 80% in real terms, do you really want to take another shot in the head with government bonds? Absolutely not.
The rest of the world will be treating Japan just like they're treating Portugal, which has 12% yields on their ten-year right now. If that were to happen, that would be a debt crisis like no other. It would make Europe look like child's play.
So how does this effect the auto market in Japan?
Well, this is a big deal. Right now, 50% of all Japanese cars, whether they be Toyota (TM) or Nissan (NSANF), are produced outside of the country. It's on its way to 85% to 90%, because the one area that the government is trying in Japan to raise revenue through is the corporate sector.
The companies themselves are very sclerotic. They have a lot of people that are kept on lifetime employment. You can hardly find a single Japanese company that is run by a foreigner. It's a jobs for life system. All of this needs to change in a more competitive world.
So, ultimately, your best bet will not be investing in Toyota or Japanese car companies. It's probably good news for Americans, Chinese auto companies, the Germans, but it's very bad news overall for the Japanese car industry.
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